When there is an adverse supply shock

Question

Quizplus · Accepted Answer

Adverse supply shocks, such as an increase in oil prices or natural disasters, lead to higher production costs for firms. As a result, firms produce less, which leads to a decrease in employment and output. This increase in production costs also leads to an increase in the overall price level, which results in a higher rate of inflation. This leads to a shift in the short-run Phillips curve to the right, showing a higher trade-off between inflation and unemployment. Therefore, the correct answer is A, unemployment rises and the short-run Phillips curve shifts right.

When There Is an Adverse Supply Shock